Last week, A-shares bottomed out and rebounded, primarily driven by improved domestic and international liquidity conditions. Broad-based ETFs saw significant net inflows as allocation-oriented funds stepped in. The softer-than-expected U.S. November inflation data and the Bank of Japan's dovish rate hike further eased global liquidity tightening concerns, creating favorable external conditions. We believe that after recent adjustments, next year's spring rally is worth anticipating. However, the market remains in a phase where fundamental expectations are being recalibrated amid a lull in policy and economic data releases. Potential catalysts for a steeper upward trajectory include post-Christmas foreign capital position replenishment, the intensive earnings pre-announcement period starting mid-January, and a possible reserve requirement ratio (RRR) cut in January. For allocations, we recommend continuing to position for the spring rally, focusing on sectors with improving fundamentals such as AI-related industries, batteries, non-ferrous metals, select chemicals, defense, and mass-market and service consumption. Additionally, thematic plays and export-oriented sectors benefiting from seasonal effects could be selectively added.
**Key Insights** *A More Promising Rally After a Pause* Early last week, domestic fundamental expectations and overseas liquidity pressures weighed on the market. However, mid-week saw substantial net inflows into broad-based ETFs as early-positioning capital entered. The softer U.S. inflation print and the BOJ's dovish move further alleviated global liquidity concerns, improving external risk appetite and creating a supportive environment for the rebound. Historically, the period between the Lunar New Year and the Two Sessions has been a favorable window for spring rallies. Post-Central Economic Work Conference but pre-Lunar New Year, market returns have been moderate, with the CSI All Share Index rising less than 50% of the time since 2010. However, negative correlations exist between post-National Day/pre-Central Economic Work Conference and post-Central Economic Work Conference/pre-Lunar New Year returns, as well as between post-National Day/pre-Lunar New Year and post-Lunar New Year/pre-Two Sessions returns. This suggests a more compelling rally after a pause.
**Potential Timing and Catalysts for Spring Rally Momentum** Historically, strong spring rallies have occurred under two scenarios: 1) short-cycle inflection points (e.g., 2013, 2020, 2024) or 2) significant domestic/global liquidity easing (e.g., 2012 Fed QE, 2015 RRR cut, 2019 RRR cut). Current headwinds to upside momentum include: 1) November M1 growth slowdown, raising concerns about credit cycle sustainability amid weak property data, and 2) the ongoing policy/data vacuum until mid-January, fostering investor caution. Key near-term watchpoints: 1) post-Christmas foreign capital flows, 2) earnings pre-announcements starting mid-January (potential upside surprises), and 3) a possible January RRR cut to support government bond issuance.
**Trading Clues During Earnings Pre-Announcement Season** From mid-January, the intensive earnings pre-announcement period will begin, potentially increasing the efficacy of fundamental pricing. Consensus estimates show the CSI 800's next-twelve-month (NTM) net profit growth resuming an upward trend last week. Sectors with the highest 2025E net profit growth forecasts include steel, power/new energy, building materials, petrochemicals, and computers. Over the past four weeks, sectors with the most significant NTM estimate upgrades include light industry, power/new energy, steel, defense, and social services. Our mid-cycle model indicates a continued but moderating decline in overall industry sentiment. Sector focus: 1) high-and-sustained-growth areas like AI-related industries, non-ferrous metals, defense, and textile manufacturing; 2) sectors showing improvement or bottoming signs, such as batteries, select chemicals, agriculture, and mass-market/service consumption.
**Allocation Advice: Position for Spring Rally with Focus on Fundamentals and Themes** Continue early positioning for the spring rally, emphasizing: 1) cost-effective segments within improving sectors—domestic computing, AI edge/applications, batteries, copper, select chemicals, defense, and mass-market/service consumption; 2) small-cap and thematic plays benefiting from last week's rebound in margin trading activity and record-high private fund filings (e.g., commercial aerospace, smart driving); 3) export chains with strong seasonal effects from Black Friday/Christmas and front-loaded shipments (e.g., home appliances).
**Risks**: 1) Lower-than-expected market liquidity; 2) outsized domestic/global fundamental downside.
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